I’ve commonly heard entrepreneurs recite some version of “I don’t want to waste too much time fundraising because it will distract me from building my business, so I’ll only talk to a few potential funders.” The idea is that a couple of highly-qualified VC conversations will follow the 80/20 rule of a “good enough” financing in a relatively short amount period without taking the time of an extended process to truly optimize the funding outcome. Better to spend energy maximizing long-term valuation by building underlying business value rather than short-term optimizing a bidding process… so the intuitive thinking goes. In a small number cases that approach can work, but in an overwhelming majority I’ve observed it doesn’t necessarily play out as planned.
The reality of the vast majority of eventually successful VC fundraises is that they are still a messy process. It’s rarely a straight line from point A to point B. Venture capital firms are comprised of people, which natural means that their idiosyncrasies seep into the process. Partners who would be interested in a potential investment are distracted by other new investments, portfolio companies, and personal matters. On top of it, there are coordination costs in communicating and politicking internally, especially in the larger firms, which can delay things further. And that’s assuming a particular partner & firm is sincerely interested… it can take a number of meetings for them and especially the entrepreneur to truly suss that conclusion out.
The primary point of leverage which entrepreneurs can exert to counteract above is scarcity in the round. Actual scarcity is better than perceived scarcity (though the latter sometimes suffices). Running a broad process initially (by approaching much more than just a handful of potential investors) empowers an entrepreneur to credibly be able to directly communicate a steadily-progressing process. The first venture firm at any one juncture progressing to the next step (first meeting, second meeting, diligence, partner meeting, term sheet, etc.) becomes the “pace-car” for that lap. As each step is completed, effectively communicating that fact to the other firms serves as a forcing function to other firms that they need to continue at the current pace or drop out of the race.
Running this type of coordinated effort broadly front-loads quite a bit of work, but systematically yields both the best – plus shortest & ultimately least effort – outcome. By contrast, without utilizing the credible threat of scarcity in the round based on timing, a dialog with a small number of funders can drag out for weeks and even months… as each wants to maintain the option value of seeing how the company progressing during the timeframe absent any instigation to act. Hence, the VC fundraising timing paradox: spending much more time up front fundraising will yield a shorter and less time-consuming process in the end.
One salient showcase of this theory in action is the successful accelerator model. While a good portion of the benefit from these programs is meaningful mentorship honing their businesses and developing customers, a disproportionate amount of effort is devoted to positioning and synchronizing the fundraising. The capstone event of a specific visible “investor demo day” serves as a pace-car for fundraising conversations, both before and after the event itself. With it, the startups’ fundraising has the best chance of being optimized, thus hopefully starting a virtuous loop around other aspects of the business.
But joining an accelerator is only one path towards running an effective fundraising process. The more common path is to navigate this process with the help of current investors, advisors and sherpas – it’s certainly less clearly defined, but so is the entire entrepreneurial road. The key is to a timely fundraising process is to set out broadly initially, rather than have stalled steps force you to do it later.